October 23, 2017

Future returns of Nifty and Sensex

In this post, we will try to estimate the expected returns from the broad market indices (Sensex and Nifty) over the next decade (By the year 2027). The idea of this post is to show our readers that we are not in a raging bull market bubble and that despite the markets being at a all time high, long term investors have ample opportunities even today to make high returns!

For estimating the future returns of Nifty and Sensex in this post, we will not use any fancy terms like GDP, growth, earnings, etc. We will just use the average historical returns of equities as an asset class and an assumption of broader market returns reverting back to these averages (Currently we are lower than the average).

Adjusted for dividends, the broader markets have given ~ 6.5% p.a. over the last 10 years. Adjusted for taxes, this is close to FD returns and that means equity investors have got no premium for assuming higher risk! Whats worse is that we have not considered inflation as of now. Lets adjust this returns figure for the average inflation and see what have the investors made.

Adjusted for inflation, investors have made less than 1% p.a. over the last decade. Now 10 years is long term and we cannot consider this as a one off case. The indices have lagged behind their historical returns and sooner or later, we will see a reversion back to the average returns.

The average historical returns of Nifty and Sensex have been 12% since the 1991 economic reforms. We expect this average to be maintained till 2027. Now we boil down to a simple math calculation that between 2007 and 2027 if we were to get a 12% CAGR, where would we end up?

From October 2007 to October 2027, if we were to clock a 12% p.a. CAGR then the Nifty would end up at 57,646 and the Sensex would end up at 1,92,926. Now from where we are in October, 2017 this ambitious target by October 2027 would require a CAGR of ~ 19% p.a.

Now if were to go and tell any investor that Nifty and Sensex can give 19% p.a. over the next 10 years, we would most probably be beaten up. After all, the worlds best investors have earned close to ~ 22% p.a. over their careers.

If you think that this is impossible, then consider the 1979-1991 phase when the Sensex averaged a humongous 28% p.a. return! This is a 12 year period that we are talking of. Also, consider the 2000-2008 phase when between two market peaks, the Nifty index gave a return of close to 19% p.a. (including dividends).

The above table shows you the ex-dividend returns of Nifty between two market peaks. You can read our detailed article on the above table here:Nifty PE at 25, what next?

So as an investor, even if you are concerned that we are at a market peak, just remember that the markets can and have historically given > 18% p.a. returns between two market peaks.